Sorry folks for not blogging sooner. I have some insights to the market, but right now I am recovering from a vicious bout of food poisoning. In the past six years I have had four food poisoning’s and three times it was from sandwiches that I bought while driving. You would think it is a problem specific to a store or country. Nope, not at all, I bought bad sandwich’s in Canada, Austria, and Germany. What was common between them all? It was the meat that went bad. (Go vegans go?)

Ok to the topic, and the book review of When Genius Failed. I was recommended this book on CNBC Power Lunch Europe by a professional trader when I asked the question, “I understand the theory behind options, pricing, hedging, Greeks, and have read the classics like Hull, but I am wondering what books I should read to implement a hedging strategy as I do not have access to professional traders?” The trader’s answer was interesting in that he said, “What you need is experience and therefore the books you should buy are Hedge Hogging (which I read), Liars Poker, or When Genius Failed.


When I heard that comment I thought the trader was mocking me. But I gave him the benefit of the doubt and bought When Genius Failed and decided to read it. Having read both books I finally understand what the trader was trying to get at. He was trying to get at the point that to trade you need experience and trading is not always about risk management. It is about understanding the dynamics of the market. As the book When Genius Failed said, “Sometimes you need to know which way the trade winds are blowing.”

Ok, so what do I think about the book? I rather like it. It was an interesting read for anybody who wants to understand what happened to Long Term Capital Management. The book does a good job of covering the story from the start to the end of LTCM. The book was not purely historical, but also tried to put things in perspective and show all of the pieces. That oversight made it possible to follow the LTCM story in the context of the markets. What I especially liked about the book is how the author kept referencing names with associated companies. EG he would say, person X who worked at company Y throughout the book. That little trick helped me keep an oversight of who’s who and what their role was.

Though, here is what I disliked about the book. For example I disliked the following comment:

If Wall Street is to learn just one lesson from the Long-Term debacle, it should be that. The next time a Merton proposes an elegant model to manage risk and foretell odds, the next time a computer with a perfect memory of the past is said to quantify risks in the future, investors should run — and quickly — the other way.

I dislike the comment because it implies that the fault of LTCM was that a computer was used to model risk. When you read the book the problem of LTCM was two fold:

  • It strayed from its core strengths.
  • It was greedy and ignored Keynes rule where the market can remain longer irrational than you liquid. When the market knew LTCM was failing without saying so, but implying, traders on purpose went against LTCM.

Both of these problems had nothing to do with the computer model. The computer model picked out the opportunities and they made money. At one point LTCM could have stopped trading due to the lack of trading opportunities, returned the money and could have started a new fund. Yet they did not due to greed, and that was their downfall. Greed in the market is a very bad thing!

Computers are not fortune tellers, nor are they money machines. Computers are capable of calculating and processing data faster than we humans ever could. If computers were bad then we would not apply technical analysis (since it requires quite a bit of computing) nor would we use it to look at past trends. Computers are a means to an ends, and when used properly are extremely useful.

There were a couple of other items I disagreed with. For example I actually do think the market is efficient, with moments of inefficiency. But these are things you either accept or do not accept.

In conclusion, putting it all together I thought this was a great book. It is professionally written, objective, and enjoyable to read. If you have not yet read this book I suggest that you do.